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Hydro One Faces ‘Ontario Overhang’ After Ford Ousts Board

(Bloomberg) -- Hydro One Ltd. fell the most since it went public three years ago after Ontario Premier Doug Ford fulfilled an election promise to shake up the utility’s executive team and ousted the board.

The retirement of Chief Executive Officer Mayo Schmidt and the resignation of the entire board late Wednesday prompted four analysts to downgrade the stock. Hydro One fell as much as 7.9 percent to a record low in early Thursday trading.

“We believe H’s shares will de-rate and suffer from a potentially long-term ‘Ontario overhang,”’ Credit Suisse analyst Andrew Kuske wrote in a note Thursday, downgrading the stock to neutral from outperform.

Getting rid of Schmidt, 60, was at the top of the agenda for Ford and his Progressive Conservatives who won a provincial election last month. The vote ended 15 years of rule by the Liberal Party, which had partially privatized the electricity transmission and distribution company. The province still owns 47 percent of the utility, according to data compiled by Bloomberg.

“We promised the people of Ontario that we would lower their hydro rates and that started by addressing leadership at Hydro One,” Ford said Wednesday on his Twitter account. “I was pleased to learn this afternoon that the CEO and all board members will be resigning.”

Unpleasant Battle

The premier doesn’t technically have the authority to remove Hydro One’s CEO, but “such protections can really only be relied upon if one is willing to fight what can be rather unpleasant battles at times,” Kuske wrote. The province does have the right to remove the board.

Hydro One’s stock was also downgraded to the equivalent of neutral by RBC Capital Markets, Industrial Alliance Securities and Laurentian Bank Securities. The shares plunged 5.3 percent to C$19.10 at 9:50 a.m. in Toronto.

“The government appears to have (at least temporarily) impaired the value of its ownership interest in Hydro One,” Industrial Alliance analyst Jeremy Rosenfield said in a note, adding that the company’s $3.4 billion acquisition of Spokane, Washington-based Avista Corp. could be at risk. Avista shares fell as much as 3.3 percent, the most since December 2016.

Ford called CEO Schmidt the “six-million-dollar man” during the election, referring to his compensation, which stood at C$6.2 million ($4.7 million) for 2017, including bonus and stock awards, according to Bloomberg data. RBC analyst Robert Kwan questioned whether Hydro One will have a hard time attracting a suitable replacement given the government’s focus on compensation.

“This is worrisome,” said Anita Anand, a professor at the University of Toronto, in an interview with BNN Bloomberg television. “Hydro One is supposed to be a private company. This is far from it.”

No Severance

Schmidt, a former player for the Miami Dolphins of the National Football League, will receive compensation consistent with Hydro One’s retirement policies and won’t be entitled to severance, according to a statement. He’ll get a C$400,000 lump sum payment in lieu of all post-retirement benefits and allowances.

Hydro One, which provides power to more than 1.3 million customers, was partially privatized by the former Liberal government in a C$1.83 billion public offering in 2015, the largest in Canada in 15 years at the time. But the Toronto-based utility bore the brunt of voter unhappiness with high electricity prices, even though the distribution company doesn’t set power rates in the province.

The Liberal government’s hydro policies have been under scrutiny from the Auditor General of Ontario which criticized the creation of the so-called Fair Hydro Trust, a complicated piece of bond-market engineering designed to finance cuts to Ontario’s soaring hydro bills by adding costs in the future.

New Board

A new board of directors will initially consist of 10 members, with the province nominating four replacement directors and the remaining six being identified by a committee comprised of representatives of Hydro One’s largest shareholders other than the province.

Current Chief Financial Officer Paul Dobson was appointed acting CEO.

The transition to a new board will take place by Aug. 15, Hydro One added.